Word Games Obscure Real State Tax Debate

December 10, 2012|Dan Haar

With lawmakers set to trudge into Hartford next week for a holiday special session to plug this year's state budget hole, it's a safe bet that Gov. Dannel P. Malloy wishes he hadn't said two weeks ago that he would avoid raising taxes to solve the crisis.

Now he's weighing whether he'll have to go against that statement. Instead of focusing purely on the issue, the governor is forced to argue about whether $22 million in revenue changes that he proposed on Friday are, or are not, tax increases.

He says no, Republicans say yes.

It's a waste of political attention and it's unavoidable. Malloy said on Nov. 27, through his budget chief, Ben Barnes, that he "would not propose tax increases as a solution" to the state's fiscal challenges. Yeesh. Talk about a controversy waiting to be born, this is suddenly a troublemaking child.

We need to get to the real question of whether Malloy will propose bona-fide tax increases in February. He addressed that on Monday, saying it depends partly on how Congress and President Barack Obama manage the fiscal slope.

But first the political theater, which matters because labels make a difference for taxpayers, just as they do for Nordstrom customers.

Malloy made it through the first week after Barnes' statement with no problem, ordering $170 million in mid-year spending cuts. Nine days later, on Friday, Malloy issued a "deficit reduction roadmap" that would cut this year's shortfall by another $220 million — including 11 items worth $81 million in revenues.

Most of those are not tax increases by anyone's definition, starting with an easy $5 million in added federal disaster aid, thanks to Sandy, and $8.5 million from cracking down on tax cheats.

But two of those revenue gainers — a cap on companies' use of tax credits for $12 million, and the closing of a loophole for electric generators for $10 million — have brought Malloy dangerously close to "read my lips — no new taxes" territory.

The state hands out in the ballpark of $500 million a year in credits allowing companies to reduce their corporate earnings tax, prodding companies to conduct research, hire veterans, offer on-site child care and make movies and TV shows, among many other activities we deem valuable. Malloy is suggesting a tweak in the rules that would, he believes, reduce the use of those credits by $12 million a year, by capping how much any one company could redeem.

"We are limiting, perhaps for a period of time, the percentage of tax avoidance that a corporation can have by buying a financial product," Malloy told reporters Monday, including my colleague Daniela Altimari. "That's not a tax increase."

And in the byzantine world of power plant accounting, Malloy wants to squeeze $10 million more from companies that generate electricity. Those firms will undoubtedly say the move will lead to higher energy prices and will quash energy efficiency. Today's question is whether it's a tax increase.

"The value of an alternative investment will be limited perhaps for a short period of time and likewise the loophole will be done away with," Altimari reported Malloy saying. "That's not a tax increase."

A couple of Republicans told Keith Phaneuf of The CT Mirror that those are tax increases, as we'd expect the opposition to say. Sen. Andrew Roraback, R-Goshen, said it best, calling the debate "an exercise in semantics."

In the end, it's an increase in the taxes the state collects but not a tax-rate increase. "We never said we wouldn't look at revenue and obviously we are looking at revenue," Malloy said Monday.

And now we move to the real question of whether Malloy will propose tax increases in February to cover an estimated $1.06 billion shortfall in the fiscal year that starts July 1.

"I refuse to make a judgment. I don't know about the fiscal cliff," Altimari reported Malloy saying Monday. "How do I make a judgment about that without knowing whether we're looking at across-the-board reductions or surgical reductions?"

Malloy is saying that defense cuts of about $500 billion over 10 years, which the fiscal cliff would force, along with a similar-sized cut in nondefense spending, would collapse the Connecticut economy. That would lead to more revenue shortfalls, which would require higher tax rates.

He's on safe ground claiming a fiscal cliff would cause mayhem in Connecticut. Moody's Analytics estimates that Connecticut would be the third hardest-hit state in a cliff scenario. The trouble is that by February, when Malloy's 2013-14 budget plan is due, we will have avoided the worst of the cliff — but Obama and Congress will still be arguing about taxes and spending cuts, so Malloy & Co. won't know what to do.

Connecticut will probably need tax increases regardless of the federal picture since the estimated shortfall is 5 percent of the budget. Cutting Medicaid won't do the trick because, starting in 2014, most health coverage for the poor gets a 90 percent reimbursement from the federal government.

It's easy to say we can slice an extra $1 billion out of personnel costs, but that would be one-fifth of the state's regular workforce, not an easy cut at a time when we're under a no-layoff agreement, signed in 2011.

Cuts to towns? Just Monday, the Connecticut Conference of Municipalities mounted an attack on Malloy's cut of $4.7 million in local money, most of it for schools, saying the governor doesn't have legal authority to touch the $2 billion-plus in town aid without lawmakers' consent. So we see where that's going.

Malloy will certainly borrow more, as he has already signaled. "If you're asking me, do I intend to increase taxes? All things being equal," he said Monday, "the answer is no, I don't."